There is no denying that retirement planning is a complicated undertaking. It's unsettling to give up a steady paycheck and flip the switch from saving to spending. Due to the complexities of retirement planning, everyone is going to make some mistakes. Here are some common missteps that I've seen those nearing or already in retirement make:
1. The absence of a financial plan. I know this sounds like an old refrain, but let me try and put it another way. Retirement is an approach/avoidance situation for most of us. People have a tough time seeing too far out into the future. We can see five years or 10 years into the future just fine, but it's harder to anticipate 20 or 30 years out, which is the typical period of time most people spend in retirement. As a result, we can often be unintentionally shortsighted.
This is why a financial plan is extremely beneficial. A good plan will show you how certain financial decisions you make today, tomorrow, or five years from now will affect your retirement 25 years down the road. Much like your car's GPS plots a course, alerts you when action is needed, and recalculates should you miss a direction, so too does a routinely updated financial plan guide you through retirement.
Simply put, if you are going to run out of money, wouldn't you want to know this very instant, so you can begin to make changes that will have an effect on your future? Wouldn't you like to know you've planned well and saved appropriately? Done correctly and consistently updated, this plan will be your greatest ally in planning for your retirement and keeping you on track.
2. Are bonds still a "safe" investment? This question has more to do with the current interest rate environment than anything else. Holding bonds in your portfolio was not considered a mistake during the 30-year bull market for bonds from 1980 to 2010, but in our current low interest rate environment, it could cost you. The possible liability, in a portfolio overweight in bonds, stems from the inverse relationship between bonds and interest rates.
Because interest rates are hovering near the bottom, it follows logically that bonds are currently priced near the top. Therefore, when interest rates begin to edge higher, people with large holdings in bonds stand to lose a significant amount of their value.
The lesson here is this: Just because a particular strategy has worked in the past, doesn't mean that it's going to continue to work in the future. Folks nearing or entering retirement need to be confident that the plans they've made are going to be successful. They can't simply rely on something that has worked in the past, without evaluating it from various angles.
3. Not purchasing long-term care insurance. As the cost of health care continues to rise, retirees will face some tough choices. No one wants to face the possibility of a long-term care event happening in the twilight years of retirement and not being able to afford care is an increasing concern. The Department of Health and Human Services estimates that, of people aged 65 and over, nearly 70 percent will need long-term care in the future. But does that mean that you should go out and purchase long-term care insurance if you don't already have a policy?
I would caution you to consider this decision very carefully. During the last few years, long-term care insurance premiums have soared, and we've seen rates increase by 40 to 100 percent. These rate increases are potentially just the tip of the iceberg, because the majority of these policy holders have yet to access continuous care and benefits. As more boomers retire amid rising health care costs we could see additional rate increases, adjustment of policy benefits or both.
If you are weary about the rising costs of long-term care insurance, an alternative is to start a "long-term care fund," that can be used to reserve funds in order to cover long-term care expenses. Using resources like the "MetLife Market Survey of LTC Costs," you can discover just how much an annual stay would cost for a particular type of care, then see if your financial position can handle that expense.
4. Not guarding against a market decline. How many people take precautions to protect against a market downturn? If you're nearing retirement and not thinking about how to protect your portfolio, you're making a dangerous mistake.
If you're 30, 40 or even 50 years old, you have a broader time horizon, which allows you to weather the storm and wait until the markets recover. If you were 100 percent invested in the Standard & Poor's 500 index from June 2009 to now you would have about a 113 percent net return. However, if you're in your 60s or 70s and have already retired, not only has your time horizon decreased, but you no longer have the wages to reinvest and are relying more on your shrinking assets to provide necessary income.
Consider this. If you have a $1 million portfolio and lose 50 percent in a downturn, while also taking out a 4 percent income stream per year, you'll need a 117 percent return to get back to where you started. As you can see, it's very easy for an individual to get behind the curve by chasing returns and carrying too much portfolio risk in retirement.
A well-diversified portfolio consisting of non-correlating asset classes is a good first start. Having an evacuation strategy to go to cash, or another asset class if the market dictates, is another. These are must haves for any portfolio in retirement, whether you're managing your own assets or you have hired an advisor.
5. The four key personal economic factors. There are four important factors that everyone must take into account when considering retirement, or any long-term investment, for that matter.
-- rate of return on investments
-- inflation rates
-- tax rates
-- personal expenditures
Of all the factors on that list, there's only one thing we can really control. We like to think that we can control the rate of return on our assets, and we can to some extent, but there are factors outside of our control that affect this. We just have to think back to the "great recession" when the Dow Jones Industrial Average fell 51.1 percent from Oct. 7, 2007, to March 9, 2009.
We know we can't control inflation and taxes. The only thing that we can control is our spending. Of course, there will be unexpected expenses, but by having a thorough understanding of what your expenses are and where you can cut back, if needed, can help you make tough decisions.
This is just a basic introduction to the factors that we see folks struggle with. The more familiar you are with information like this, the better positioned you w ill be to not just gain a better understanding of your situation.
Kelly Campbell , certified financial planner and accredited investment fiduciary, is the founder of Campbell Wealth Management and a registered investment advisor in Alexandria, Va. Campbell is also the author of "Fire Your Broker," a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.
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